According to an equity research report by Jefferies, office demand in India will remain strong despite the continuation of work from home practice by several companies. The 99% collection efficiency reported during 2020-21 reflects the stable and high-quality tenant profile of the Indian office space, with several large MNCs having significant workforce in India, says the report.
Office demand will be mainly assisted by tech outsourcing which according to the report constitutes 60-70% of Indian office demand. A spurt in hiring to record levels in FY22 has created fundamentally strong conditions for office demand. However, the tech sector has also been at the forefront of the work-from-home (WFH) shift, and leasing has not been commensurate with hiring. Consequently, office vacancies have increased by 6ppt since pre-COVID, and rentals have stagnated as leasing volumes declined 35% over the long term average. According to Jefferies’ analysis, even if the tech sector permanently moves to 3-days-a-week hybrid work model, its impact on office demand is largely factored in. “Offices are re-opening now and as employees return, the imperative for leasing new space will gain momentum. Rental increases will follow, but are likely a 2023 story.”
The office market has also seen consolidation, with 40% of Grade A offices owned by large developers / global PEs. Industry consolidation should ensure long-term supply and rental discipline, says the report.
The commercial office cycle was on a strong footing in 2019 with a record high 45m sf in net absorption, helped by steady hiring in the tech industry and the rise of Indian start-ups. The office segment has followed a somewhat different cycle to the residential space. The housing space, which went through a downturn from 2013 to mid 2020, has seen a sharp recovery over the last 18 months. The office space was in an upcycle since 2016, but the post-COVID challenges have brought the upcycle to a sudden halt. Net absorption levels have declined to 20-22m sf/annum, -35% vs. the pre-COVID average, as tenants delayed office leasing decisions. However, there are reasons to believe that the trend in leasing is about to revert to normal levels in 2022, the report said.